Walt Disney Co DIS’s ambitions for Disney+ far exceed analyst expectations. The company targets 60-90 million subscriptions for its direct-to-consumer service by 2024, management said at Thursday’s Investor Day presentation.
It also expects the streaming platform to reach profitability by 2024 — one year after Hulu and ESPN+ are scheduled to post profits and two years sooner than UBS forecasted. The timeline bolstered Street confidence.
“In short, we view the company’s high quality IP, expanded original content lineup, engaging user interface, competitive pricing ($6.99/mo. for Disney+) and go to market strategy (leveraging all DIS assets globally) all highly favorably, boosting our conviction in incremental value creation potential via DTC,” Bank of America Merrill Lynch analysts Jessica Reif Ehrlich and Bryan Goldberg wrote in a note.
Given the value of Disney+, they suspect management is conservative in its subscription targets, and JPMorgan posits conservative profitability guidance.
Disney said it would roll out more than 25 original series and 10 movies throughout the first year of Disney+, and it would be the exclusive streamer of all 30 seasons of "The Simpsons."
“The extensive content and completeness of key areas like Pixar and Star Wars was a positive surprise, and the ARPU suggests subscriber, rather than revenue, maximization early on,” RBC Capital analyst Steven Cahall wrote.
“With a low price point of $6.99 per month and robust content with four quadrant appeal, we would expect a steep initial ramp in subscribers,” analysts Alexia Quadrani and David Karnovsky wrote. “Combining this rapid ramp with ongoing growth in the core underlying business and synergies from the Fox deal, we have strong conviction that shares of DIS are well positioned to outperform ahead.”
They consider Disney’s potential penetration superior to that of any other streaming service. Between that and its lower-than-expected price, Disney+ could well rival Netflix, Inc. NFLX or Amazon.com, Inc. AMZN.
“Disney also announced that its content will be downloadable with no restrictions, competitive with the functionality of Netflix and Amazon Prime Video,” Quadrani and Karnovsky wrote. “Disney also showcased the interface for the product, which appears similar to that of Netflix with personalization of user profiles, recommended content, search capabilities, and parental controls.”
Shawn Cruz, senior trading specialist at TD Ameritrade, thinks Netflix concerns might be overstated.
"The one reason why I don’t see this as a competitive development for Netflix is, is Disney growing their share of the pie, or growing the pie?" Cruz told Benzinga. "Disney isn’t charging an exorbitant amount where you’re going to decide one or the other. You’re going to tack on the Disney service to what you already have. You’ve still got a long way to go where it becomes something where it’s approaching the area of what you were paying for cable."
The Costs Of Greatness
Bank of America noted “bold” costs to achieve value and ultimately cut its 2020 and 2021 bottom-line estimates to accommodate $3.5 billion to $4 billion in annual dilution. RBC Capital expects less than $3 billion in 2020 costs, but UBS posited the sacrifices may be greater.
“Management did not provide specific guidance on forgone licensing revenues (outside of $2.5B for Disney+) but we believe commentary suggest a longer tail to content licensing than we had previously modeled,” UBS analysts John Hodulik and Batya Levi wrote in a note.
Still, RBC Capital said the drag on EPS appears better than expected, and Bank of America welcomes the costs, noting the DTC opportunity creates an EPS floor.
Uncertainties linger around deal synergies, the next CEO, the path to full Hulu ownership and plans for launching Hulu internationally, but analysts are still largely bullish.
- Bank of America Merrill Lynch maintained a Buy rating with a $144 price target;
- JPMorgan maintained an Overweight rating and raised its target from $125 to $137;
- RBC Capital maintained a Top Pick rating with a $140 target; and
- UBS maintained a Buy rating with a $128 target.
At time of publication Friday afternoon, Disney's stock traded up 9.5 percent at $17.80 per share.
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